Tax Reform: How to Change from VAT to Non-VAT

The Tax Reform for Acceleration and Inclusion, more popularly known as TRAIN, has amended the tax code to increase the VAT Threshold from P1.919 Million to P3.0 Million. If you are a registered VAT taxpayer earning less than P3.0 Million, you may now opt to be non-vat instead. This is great for services and high margin businesses as this will most likely result in tax savings.

Who’s eligible to change their tax type from VAT to Non-VAT?

Taxpayers whose Gross Sales/Receipts are less than or equal to exactly P3.0 Million in 2017. To be clear, by Gross Sales/Receipts, this is your earnings before ANY deductions.

How do I change from VAT to Non-VAT?

Download Form 1905 (xls / pdf) – Application for Registration Update. Do make sure you check for the latest version of this form on the BIR website.

Fill out your form 1905 this way:

Part I, Field 1: Enter your TIN

Part I, Field 2: Enter your RDO Code

Part I, Field 3: Enter Taxpayer’s Name (we recommend you double check with your COR and check the matching fields there)

Part II: Tick (‎✔) letter G

Part II, Field 4G: Write Value-Added Tax under Cancelled Tax Types (the BIR will fill out the rest of these fields)

Part II, Field 5: Fill out and sign this section.

Additional Tips:

You MAY need to change your books of accounts AND your receipts. There are variances between RDO’s on this so better ask them when you submit your Form 1905. If you do need to change your receipts, you need to fill out a Form 1906 – Authority to Print Receipts so it may be a good idea to have it ready. Also, may be good to purchase 2 to 4 columnar books so that you don’t have to pay for overpriced ones that are invariably sold beside the RDOs.

When do I have to do this?

According to the advisory, you must file the accomplished BIR Form 1905 on or before March 31, 2018. Since March 31 is a Saturday, we recommend that you file on March 30, 2018 at the very latest. Of course, the earlier the better!

EDIT: The BIR recently released RR No 15-2018, extending this deadline to April 30, 2018. So if you want to change from VAT to non-VAT, do it before then!

What happens if I forget to file my Form 1905?

If the BIR does not receive your Form 1905, the BIR will take that as you opting to still pay VAT.

EDIT: If you missed the March 30, 2018 deadline, you can still update your registration via Form 1905, BUT you will have to show that you did not exceed P3,000,000 gross sales/receipts in the previous THREE years.

This article was written to help demystify and simplify the changes brought about by the TRAIN law. Taxumo was also created to continuously improve with the same spirit, by letting you compute and file your taxes online in minutes!

Following the BIR Tax Advisory, what is meant buy this statement ” Unless the taxpayer signifies in the 1st quarter of the taxable year the intention to elect the 8% income tax rate, the taxpayer shall be considered as having availed if the graduated rates under section 24(a) of the tax code.”

If we would like to elect 8%, does this mean we need to request it in writing to the RDO or would BIR Form 1905 (change of tax type to remove percentage tax since I am non-vat) suffice? Or if there;s another process process? Please advise. Thanks.

Hi.
I have been a VAT taxpayer for the 3 or 5 years. Since My income last year was below the 3 M threshold, can i apply for NonVat before March 31?
I was told by my accountant that i need to wait for 3 years to downgrade, even if my income is below the new threshold.
Thank you

my client is a vat registered but stopped selling vatable goods in 2010. at present he is using the vat receipt since he has not changed his tax type from to non-vat. is there a penalty for not changing the tax type?

Hi Minerva, just gross sales of 2017 IF you change your registration BEFORE March 31, 2018. After that, you can still change, but you’re now checking for the past 3 years. You can read more about that in this new article I wrote. 🙂

Hi Lani, percentage tax (non-vat) is applied to the cash/amount you received. So it would be after any discount you gave. Note that there would of course, no longer be any vat exemption as you’re no longer vat. 🙂

Hi, talked to an RDO officer yesterday, it is still at 3% for non vat entity, given you do not apply for the consolidated income which is up to 3m annual at 8% rate. if you think you will go beyond the 1,919,5000 annual income, you should apply for the 8% rate non vat (up to 3m income) and your ta type will be changed.

A question for the BIR, my friend. Our question as well. 😉 With [Taxumo] we are helping the BIR adapt to changes – what were formally seen as advantages but are now becoming hindrances, can be fixed through technology. With your support we can continue to help the BIR become a world class government department!

As per the blog:
“If you missed the March 30, 2018 deadline, you can still update your registration via Form 1905, BUT you will have to show that you did not exceed P3,000,000 gross sales/receipts in the previous THREE years.”
No penalty po.

It depends po on whether your VAT-relevant expenses are enough to drive down your vat dues. If it is, VAT may still be a good option for you. For manufacturing/sales of goods where there are a lot of expenses, this may likely be the case. For services, however, most of the time their VAT-relevant expenses are not enough to drive down your VAT dues (at 12%) so definitely the non-vat is a more attractive option.

Having said that, it does vary from case to case so it would be specific to your particular business.

Hi Ana – normally, they would check if you have any open cases. So if you have any unsubmitted filings, they will point that out and tell you. They may also want to check your books of accounts and see if you filled them out properly. It won’t be a full blown audit but they may do some checks. Now with respect to ORs, you may need to replace all your OR booklets if you change from VAT so they may ask for those booklets as well. 🙂 Hope that helps!

Hi JC, the gross sales (inclusive of taxes) is considered when checking the P3M threshold for VAT. If your gross sales are less than P3M, you can opt to be non-VAT.

Non-Vat Taxpayers pay a (usually) 3% Percentage Tax on Gross Sales + Income Tax. Also less compliance requirements.
VAT Taxpayers pay 12% on their sales + Income Tax. Granted they can deduct the input taxes they get from sales to effectively lower it – but this would usually make sense only if your expenses are a considerable part of your income (low margin businesses). Also, there’s much more compliance requirements for VAT.